On-chain Metrics (Part-2) - Steemit Crypto Academy- S4W3 - Homework Post for @sapwood

in hive-108451 •  4 months ago 

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Question 1 - What is the difference between Realized Cap & Market Cap, How do you calculate Realized Cap in UTXO accounting structures? Explain with examples?

Market Cap

When it come cryptocurrency, market cap for short is one of the popular and most important terms in the cryptocurrency space. Market cap of any cryptocurrency asset is basically the total value of any cryptocurrency asset derived from the result of the multiplying the market price by the circulating supply of the cryptocurrency asset.
Simply put, the market cap of any cryptocurrency is derived from the following calculation;
Market Cap of a particular cryptocurrency asset = Market price x the circulating supply

Let’s take for example, using the MATIC token, from the screenshot of coinmarketcap, we can see that the price of MATIC is $1.12 and the circulating supply is 6.65 Billion MATIC. The Market cap is simply $1.12 x 6.65 Billion = $7,447,047,872 as we can see on coinmarketcap.

Realized Cap

Realized cap is basically a different form capitalization that is derived from market capitalization. It determines the true value of any cryptocurrency asset. Realized cap is basically the summation of each unspent transaction output UTXO based on the price when it was transacted last. We all know that cryptocurrency assets can be lost, this is where realized cap comes in, as it deducts cryptocurrencies that have not been unmoved or transacted for a prolonged period of time. The realized cap is seen as an effective way to measure the actual value of a cryptocurrency.

Difference between Realized Cap & Market Cap

  • Realized cap is basically the true value of UTXO basically the summation of UTXO based on the price when it was transacted last. While Market cap is basically the total value of any cryptocurrency asset derived by multiplying the market price by the circulating supply.

  • Realized cap is affected by number of trade transactions made. While market cap is not affected by trade transactions made.

  • Realized cap is only calculated for cryptocurrencies with UTXO. While Market cap is calculated for any cryptocurrency asset with a known circulating supply and price.

  • There is less volatility in realized cap due to how it is calculated. While market cap is more volatile because any change in price affects the market cap.

  • Calculating realized cap manually is takes a lot of time and is a bit complex. While calculating market cap is very simple and straight forward.

Calculating realized Cap in UTXO accounting structures?

Let’s take for instance, using the formula;

Realized Cap = Value x Pricecreated of all UTXOs
Price in USD ($)

Assuming,
The total UTXO not moved = 400 XRP

Since Jan 31st, 2017

UTXO not moved = 150 XRP
Price of XRP the last time it was transacted = $0.007

Since Jan 31st, 2019,

UTXO not moved = 50 XRP
Price of XRP the last time it was transacted = $0.35

Since Jan 31st, 2021,

UTXO not moved = 200 XRP
Price of XRP the last time it was transacted = $0.5

The Realized cap will be calculated as;
Realized cap = (150 x 0.007) + (50 x 0.35) + (200 x 0.5)
1.05 + 17.5 + 100 = $118.55

Therefore the realized cap is $118.55

From the calculation on my assumption above, we can see that the realized cap of XRP on Jan 31st, 2021 was $118.55.


Question 2 - Consider the on-chain metrics-- Realized Cap, Market Cap, MVRV Ratio, etc, from any reliable source (Santiment, Glassnode, etc), and create a fundamental analysis model for any UTXO based crypto, e.g. BTC, LTC [create a model for both short-term(up to 3 months) & long-term(more than a year) & compare] and determine the price trend/predict the market (or correlate the data with the price trend)w.r.t. the on-chain metrics? Examples/Analysis/Screenshot?

Fundamental Analysis Model For ETH

For this analysis, I will be making use of the On-chain Metrics on https://app.santiment.net

Realized Cap

From the explanation of realized cap earlier, which is that realized cap is basically the summation of each unspent transaction output UTXO based on the price when it was transacted last, and the calculation, it is clear that the realized cap of a particular cryptocurrency with UTXO will also increase when price is rising. This is because when the price is rising in bull market by creating higher highs and higher lows, there will most likely be more trading activity as there will be more UTXO spent to capitalize on the price increase. Also, when the price is falling in a bear market, the realized cap moves sideways or decreases slightly due to the low trading activity as a result of more holders to hold the UTXO. This is also what happens when the price is moving in a sideways direction as there will be more holders to hold the UTXO.

Short term analysis (3 Months)

Screenshot (4094).png

Looking at the ETH analysis in the past 3 months chart above, we can see that the price of ETH was ranging and moving up and down between $1,874 on 22nd Jun and $2,202 on 27th July. From that time period, we can see that the realized cap also almost moving in a sideways direction with minimal gradual increase from $118.77B to $120.65B. On 28th July, the price of ETH began to increase in an uptrend direction. We can also see that the realized cap was increasing as well, increasing from $121.21B all the way up to $131.63B.

This showed that realized cap increases when the price is rising in an upward direction. When the price is bullish and rising in an uptrend direction, the UTXO was now spent as more and more traders and investors are capitalizing on the price increase. This causes the realized cap to increase as well, which means that the spent coins increased in value. And also, when the price is bearish and falling in a downward direction, the UTXO remained unspent as there are more holders who are holding and waiting for the price to be bullish and rise. This causes the realized cap to move sideways.

Long term analysis (1 Year and 1 Month)

Screenshot (4096).png

Looking at the ETH analysis in the past 1 year and 1 month chart above, we can see that the price of ETH was ranging between $385 on 22 Aug 2020 and $578 on 24 Dec 2020. From that time period, we can also see that the realized cap was moving sideways with a slight upward increase, moving slightly from $26.76B to $33.58B. On 25th Dec 2020, the price of ETH entered an uptrend and increased from $612 to $4373 on 12th May 2021. Within this period, we can also see that the realized cap followed this increase, rising from $33.28B to 111.59B.

The price of ETH had a rapid fall from $4373 on 12th May down to $1926 on 23rd May 2021. However, during that period, the realized cap didn’t reflect this downward move as it was moving sideways. As the price of ETH began to reverse upwards, it hit a resistance level of $2877 and began to range for a while before falling down to hit a support level of $1756. During this period, the realized cap also reflected the sideways movement. The price of ETH broke the resistance level on 6th Aug 2021 and began to rise upwards. Increasing from $2877 to $3976 on 3rd Sept, before going into a downtrend. During this period of price increase, the realized cap was also increasing, rising from $121.08B to $131.63B.

Market Cap

From the explanation of market cap earlier, which is that the market cap of any cryptocurrency asset is basically the total value of the cryptocurrency asset derived from the result of the multiplying the market price by the circulating supply of the cryptocurrency asset. This makes is clear that there is a strong relationship between the price and market cap because market cap follows the direction of the price. If price increases, the market cap will also increase and if price is decreases, the market cap decreases, based on the amount of coins in circulation.

Short term analysis (3 Months)

Screenshot (4097).png

Looking at the ETH analysis in the past 3 months chart above, we can see that the market cap and price are perfectly matched in terms of direction of movement. In the period where price of ETH was rising, the market cap was also rising. We can see that the price of ETH increased from $1764 from 20th July to $3318 on 13th Aug. During that period, the market cap increased from $202.97B to $388.72B. In the period where the price of ETH was ranging, the market cap was also ranging. We can see that the price of ETH was ranging from 14th Aug to 30th Aug. During that period, the market cap was also ranging. In the period where the price of ETH was falling, the market cap was decreasing. We can see that the price of ETH began to fall from $3962 on 5th Sept to $2767 on 21st Sept. During that period, the market cap decreased from $465.77B to 322.81B.

Long term analysis (1 Year and 1 Month)

Screenshot (4099).png

Looking at the ETH analysis in the past 1 year and 1 month chart above, we can see that there isn’t any difference as the short term analysis because the market cap and price are closely related to each other in terms of direction of movement. As price increases, the market cap increases as well. As price was ranging, the market cap was moving sideways. As price was falling, the market cap was decreasing, based on the amount of coins in circulation.

MVRV Ratio

This is another on-chain metric that is derived from the result of dividing the market cap of a particular cryptocurrency by the realized cap. This helps to determine whether a particular cryptocurrency asset is overvalued or undervalued. On the MVRV ratio graph, it plots the average price cap. When the value is too low, it is considered that the price of the particular cryptocurrency asset is undervalued. When the value is too high, it is considered overvalued. MVRV tends to increase when price increases. If the MVRV value above 100% and creating higher highs and higher lows, it is a strong indication that the uptrend would most likely continue. Also, If the MVRV value below 100% and creating lower highs and lower lows, it is a strong indication that the downtrend would most likely continue.

Short term analysis (3 Months)

Screenshot (4100).png

Looking at the ETH analysis in the past 3 months chart above, we can see the relationship between the price movement and the MVRV ratio movement. In the period where price of ETH was rising, the MVRV ratio was also rising. We can see that the price of ETH increased from $1824 from 27th Jun to $2382 on 7th Jul. During that period, the MVRV ratio increased from 78.34% to 126.13%. The price of ETH went into a downtrend on from 7th Jul to 20th Jul, decreasing from $2382 to $1742. During this period, the MVRV ratio value also decreased, moving from 111.71% to 73.41%. This clearly shows that the direction movement of MVRV tends to follow the same direction movement of the price.

Long term analysis (1 Year and 1 Month)

Screenshot (4123).png

Looking at the ETH analysis in the past 1 year and 1 month chart above, we can see that the MVRV ratio is following the direction of the price movements. In the period where price was rising and creating higher highs and higher lows, the MVRV ratio was also rising. The period where price decreased, the MVRV ration decreased. We can see that the price of ETH increased from $362 from 24th Jun 2020 to $1279 on 10th Jan 2021. During that period, the MVRV ratio also increased from 44.33% to 115.62 %. However, on 6th Jan 2021, the price of ETH increased from $1212 to $1414 on 19th Jan 2021, but during that period, there was a divergence in the MVRV ratio as it showed a decrease from 261.71% to 236.19%. There was a continuous upward price movement from 2nd Jan 2021 to 20th Feb 2021. However, the MVRV ratio showed irregular movement and not having a clear upward trajectory. In other periods, the MVRV ratio followed the direction of the price.


Question 3 - Is MVRV ratio useful in predict a trend and take a position? How reliable are the upper threshold and lower threshold of the MVRV ratio and what does it signify? Under what condition the Realized cap will produce a steep downtrend?

In my opinion, the MVRV ratio can be used to predict a trend. Like I explained above, if the MVRV value is above 100% and creating higher highs and higher lows, it is a strong indication that the uptrend would most likely continue. Also, If the MVRV value is below 100% and creating lower highs and lower lows, it is a strong indication that the downtrend would most likely continue. This makes it a great signal for taking positions. We can see from both the short term and long term examples above that the movement direction of the MVRV ratio was closely related to the movement direction of the price of ETH.

Reliability of Upper threshold

When it comes to MVRV ratio, the upper threshold is not all that reliable simply because the upper threshold does not guarantee that that the price would reverse to the downside. There is still a possibility that even though the MVRV ratio is showing upper threshold, price can continue to make higher highs and higher lows. This makes the upper threshold not a reliable signal for selling.

Reliability of lower threshold

As far as the MVRV ratio is concerned, the lower threshold is very important and useful as it can signal undervaluation of coins. The lower threshold has shown to be very reliable in signaling potential reversal in the market. When the market is in a downtrend, there is a higher chance that the lower threshold will be accurate in predicting price reversal to the upside. This makes it reliable and a great indication for buying.

Under what condition the Realized cap will produce a steep downtrend?

In my opinion, this is rarely the case because the realized cap has shown to either decrease gradually when the price is falling, or move sideways. This is because when the price is falling in a bear market, there are low trading activities as a result of more holders to hold the UTXO. This is also what happens when the price is moving in a sideways direction as there will be more holders to hold the UTXO. However, for the realized cap to will produce a steep downtrend, it means that there is a high selling pressure from UTXO holders selling at a much lower price compared to what they bought. This can be as a result of negative sentiment from the market or negative news that clearly indicates that there will no longer be value in the held coins. Looking at the all-time period, we can see that there has never been a steep downtrend on the realized cap of ETH.

Screenshot (4126).png

Conclusion

When it comes to trading or investing in any cryptocurrency asset, on-chain metrics have proven to be a very valuable tool when it comes to price prediction and analysis. Market cap, realized cap, MVRV ratio are all very important and valuable on-chain metrics that when utilized correctly can provide useful information for trading and investing.

@sapwood

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